The actin-regulatory protein villin is tyrosine phosphorylated and associates with phospholipase C-γ₁(PLC-γ₁) in the brush border of intestinal epithelial cells. To study the mechanism of villin-associated PLC-γ₁ activation, we reconstituted in vitro the tyrosine phosphorylation of villin and its association with PLC-γ₁. Recombinant villin was phosphorylated in vitro by the nonreceptor tyrosine kinase c-src or by expression in the TKX1 competent cells that carry an inducible tyrosine kinase gene. Using in vitro binding assays, we demonstrated that tyrosine-phosphorylated villin associates with the COOH-terminal Src homology 2 (SH2) domain of PLC-γ₁. The catalytic activity of PLC-γ₁was inhibited by villin in a dose-dependent manner with half-maximal inhibition at a concentration of 12.4 μM. Villin inhibited PLC-γ₁ activity by sequestering the substrate phosphatidylinositol 4,5-bisphosphate (PIP₂), since increasing concentrations of PIP₂ reversed the inhibitory effects of villin on PLC activity. The inhibition of PLC-γ₁ activity by villin was reversed by the tyrosine phosphorylation of villin. Further, we demonstrated that tyrosine phosphorylation of villin abolished villin's ability to associate with PIP₂. In conclusion, tyrosine-phosphorylated villin associates with the COOH-terminal SH2 domain of PLC-γ₁and activates PLC-γ₁ catalytic activity. Villin regulates PLC-γ₁ activity by modifying its own ability to bind PIP₂. This study provides biochemical proof of the functional relevance of tyrosine phosphorylation of villin and identifies the molecular mechanisms involved in the activation of PLC-γ₁ by villin.